Dear Angel Investor,
There’s something I talk about often with those I mentor.
It’s the importance of understanding the type of startup you’re dealing with before making the investment.
That means asking the tough questions… like…
What’s the force that’s driving them towards success… or failure?
As angels, it’s easy to get caught in the hype of an innovative product offering.
But take that away and what are you left with?
I like how Launchpad’s CEO Janet Kraus breaks down businesses into three types. She explains that every business functions as one (or more) of these three classifications.
Oxygen, Aspirin, Jewelry.
Oxygen type businesses provide products or services that consumers can’t live without. Businesses that fall under the “aspirin” category offer products that reduce a certain kind of pain for customers, but aren’t necessarily essential to survival. Lastly, jewelry types are luxurious and elevate a customer’s lifestyle, while creating an addiction to the product.
So which of these business models is best?
The goal, of course, is to find a startup with a killer idea made up of a mixture of all three of these components.
Here’s an example of a product that’s a great combination of all three: the Apple iPhone. Within one phone, a customer’s basic need for making calls and checking emails is conveniently achieved (oxygen), while having access to GPS navigation, counting daily steps and tracking fitness (aspirin), all the while having their complete music collection, photo library, and social media platforms on hand (jewelry).
Finding a product that ticks off boxes in all three categories can feel a lot like searching for a needle in a haystack. Or hoping to spot a golden unicorn in the wild. It just doesn’t happen all that often.
So you don’t need to wait to invest until you find your very own golden unicorn. If you can’t find the enigmatic three-for-one special, focus your energy on looking into startups that fall into the “oxygen” category.
Find your investment home within a startup that’s aiming to sell stuff that people really think they need. Traditionally, these sorts of companies pan out as good investment opportunities. Even more so, when there’s a healthy amount of risk involved.
Today, I’m going to break down each category and help you know what to focus your attention on.
When hearing pitches, there are a few things to keep handy in your back pocket. First of all, get used to asking yourself, “is this product a need-to-have (oxygen) or a nice-to-have (aspirin/jewelry) product?”
Of course, this alone can be tricky, as we’ve only gotten sneakier at manufacturing desire and presenting it as a necessity. Take the cosmetic industry for example – half of the beauty products sitting in our showers, we don’t actually need but we think we do (aftershave, shower gel, elaborately specific creams, etc.).
Lines separating these categories aren’t so rigid. It’s likely that oxygen buyers are only a subcategory of aspirin buyers, the only difference being the market size and spending priorities.
Oh, and how great a company is at marketing desires into necessities.
See that your startup CEO’s have done some market research of their own. They should reach out to current and prospective customers asking questions like:
“What problem does our product solve for you?”
“Amongst your top problems, how important is it to solve this one?”
They should spend a good amount of time gathering customer feedback (and feel free to do some market research of your own!) Dig deep and get the hard stats. Conducting due diligence in this way will help clearly steer the ship in the long term.
This kind of insight is tremendously helpful because it allows the chance to hear directly from customers, in their own words which problems of theirs are resolved. Does it match the supposed problem and solution that was pitched to you?
You’ll be able to see for yourself. If the pitch and the research line up, you’ll know that your CEO has an accurate read and does a good job listening to their audience.
Hearing how much of a priority consumers find the product to be in regards to relieving pain, can yield useful insight and help magnify which category the product truly exists in. If it solves one of the consumer’s top three problems, you can rest assured that you’re in oxygen territory.
Anything in the middle is aspirin and at the bottom tier, you’re in jewelry land.
Take a Tiffany & Co. diamond engagement ring, for example. It can be anywhere from 3 to 10 times more expensive than a worthwhile competitor’s. Yet the company rakes in sales year after year, with a valuation of 14 billion dollars today.
So there’s nothing wrong with getting behind a company whose product falls under the jewelry category, there are just a few things you should know.
Firstly, you have to know that this kind of investment requires a different approach. Mostly because prospective customers are based on demographics rather than a specific audience. Demographic targeting is typically aimed toward a specific gender and a general age range, while audience targeting is more specific to age and often interest-based.
Your founder should already be in the mindset of their demographic audience, displaying ample understanding of who they are and the general values shared within the group. They have to understand what the audience is willing to spend their money on and be sure to present their product line in a way that paints broader strokes, avoiding specificity.
So this is good news for you angels who’ve spent time in business selling to a specific demographic. It’ll be like muscle memory. You can draw on past experiences and lean on developed skills to determine whether customers will buy the products at hand. But know that you yourself are a golden unicorn, as most investors aren’t market experts.
Hambleton Lord, cofounder of Seraf and all-round angel investment extraordinaire says this of “jewelry” companies,
“Suppose you are thinking of investing in a new video game company. They’ve built an awesome new game and you and your kids really enjoy playing it. Now, ask yourself the following question: ‘Am I confident that 5 million American Teenage boys, ages 12 to 18, will play this game for the next 3 years?’ If you can’t answer this question, you should think twice about investing.”
I get wanting to invest in a jewelry company. Maybe you’ve fallen in love with the product, or you just really like the founder. Whatever the reason, it’s totally fine! You just have to be willing to accept greater risk since the product isn’t essential within its market. And be sure that jewelry startups make up only a small portion of your investment portfolio.
The products that come from your startup should be smart, standing out amongst the competition, differentiated, and defensible.
Once again, asking brand champions will help glean some insight here. Founders should be asking current and prospective customers these sorts of questions…
“How are you solving your problem today?”
“Have you used similar products before?”
“Did you look at any competitive products?”
“Are you considering any alternative ways of solving the problem?”
Differentiation is all about noting the distinctions that matter most to customers. Startup CEO’s are obsessed with their products and are often too close to recognize potential blindspots. Your job as an investor is to help bring a wider perspective, helping to incorporate the differentiators that matter most to consumers. Make sure those key markers are present and prominently displayed in the product.
This is all about customer retention. Your startup worked hard to fish out a customer base, but can they keep them engaged? Will pricing power hold up? Will their margins stand strong against the existing and future competition? Against a changing environmental market? Does the startup have a compelling offering and will they stand the test of time?
Your founders will do you a favor by including outside market experts in research gathering. The more the merrier, and the less chance of getting blindsided by competition that’s already doing well in the market.
As we covered in 8 Success Hacks For Angel Investors, there are a handful of questions that can serve as a sort of checklist when considering your next investment. Add this to the checklist!
Developing the habit of identifying which category a company falls under will help you more clearly determine where you want to put your money.
Remember, oxygen is the safest bet, but with the right kind of marketing, aspirin and jewelry can be worth betting on!
The year started off with equities, bonds, and gold all racing higher. An upcoming election painted uncertainty. Yet, Fed policy actions indicated that investors had nothing to worry about.
That was 2008… the peak before the Great Recession.
But what about the present?
2019 saw an unprecedented run in most asset classes… while 2020 looks just as frothy.
All of the markets soaring at once reminds me of past bubbles. While valuations haven’t run rampant in one particular area, the broad lift in the markets concerns me much more.
Consider the following – when investors flee stocks they park their money in bonds and gold for safety. But what happens when they all crash out at the same time? Where does the money go?
That isn’t a scenario you want to live through. But it’s one I must prepare you for.
Today I want to talk to you about risk, which sector faces the most, and how to profit off a potential downturn in the market.
To do that, I’ll be going over charts in GLD, XLF, USO and more.
Last week, I noted that the financials aren’t making new all-time highs. The easy money from the Federal Reserve, along with their balance sheet expansion, continues to drive down bond yields. In turn, that’s making it harder for banks to make money.
XLF Weekly Chart
In fact, financials closed the week well below the recent highs and the 13-period moving average in the same timeframe.
If that’s not an ominous sign, I don’t know what is.
While everyone is focused on stocks making new all-time highs, gold and bonds both prepare to break through their resistance areas.
Gold finished the week within pennies of the recent highs in a very bullish position.
GLD Weekly Chart
When you look at the hourly chart, there’s a clear bullish channel with a series of higher highs and higher lows.
GLD Hourly Chart
I don’t see any reason gold won’t push through the old highs in the next few weeks. With stocks overextended, even if they melt-up further, the ensuing pullback should push the GLD through the round $150 level.
Bonds draw out a different pattern, but a really cool bullish chart.
TLT Hourly Chart
What’s really neat is how this chart reminds me a lot of Nathan Bear’s TPS setups. Price exhibits a clear bullish trend. Then, it moved into a wedge consolidation where the range contracts more and more.
Once the range squeezes to a point, I expect we’ll see a sharp push higher in bond prices. Since stocks and treasuries often move in opposite directions, that doesn’t leave me with a good feeling for equities.
Oil and natural gas face a lot of headwinds. Both experienced staggering selloffs in the last couple of months. Yet, the tide could be turning for these commodities.
Crude oil’s chart shows a double bottom forming that could lead to higher prices for black gold in the coming weeks.
USO Hourly Chart
The long-term outlook hasn’t changed, but the oversold conditions should lead to a bounce for a few weeks.
Similarly, I’m seeing natural gas form a base.
UNG Hourly Chart
While it doesn’t have as clean of a bottom as oil, it should get a sympathy rally if crude begins to take off.
That could give the SPY some life. Remember, a lot of the drag in the S&P 500 came from horrible results from energy companies. If commodity prices rise, that could change their outlook and boost the index.
How can we tell if this is true? Look for relative outperformance of the SPY to the QQQ. With the more tech-heavy QQQ, rising energy prices won’t help boost its ETF price.
Anyone who thought the dollar’s days were numbered feels the scorch marks on their face from the greenback’s recent move. After a short pullback to the 200-period moving average on the daily chart, the U.S. Dollar took off like a rocket to pass its old highs.
UUP Daily Chart
The main dollar index is now just above $99. We’re getting really close to $100 for the index, which is known as ‘par.’ We last saw that in 2017 and will likely see it in the coming months.
Volatility contracted the last few weeks as stocks rose. That makes options cheaper to buy. I’ve already taken a few swing trades using this idea. In fact, it’s how I position my Bullseye trade of the week.
There’s still a little momentum left to the upside that should play out within days to weeks. During that time, I’ll be keeping my eye on key momentum stocks like CMG, RH, and others. However, I am and plan to be long gold for the foreseeable future.